Drew Ierardi is a force to be reckoned with. “Don’t challenge him in a debate; he is on a different planet in terms of brainpower,” says one placement agent about the managing director of private markets at Exelon Corporation Private Pension Fund.
A $17 billion-$18 billion fund with a 26 percent allocation to alternatives at the end of 2017, the seed of Exelon’s private markets team was planted after the great financial crisis with the appointment of Chrysler investment veteran Douglas Brown as CIO, who hired a raft of new people, brought in a liability-driven investment model and decided to insource as much of the investment process as possible. At the same time, the private equity team began the transition from being an occasional funds of funds investor to a sophisticated fund picker.
“The thought was that trying to invest a multibillion-dollar portfolio via remote control was a little ridiculous,” Ierardi says. “We may not be making the correct decision every time but at least our decisions are our own. There’s a clear line of accountability.”
Exelon also invests out of its $13 billion nuclear decommissioning fund. Contrary to the approach employed by many large plans, Exelon generally eschews large, multi-strategy managers in favour of smaller specialists. The pension “finds niches in the market and mines them effectively”, says one London-based placement agent.
Exelon backed the $265 million debut fund of Luminate Capital Partners, a spin-out of Silver Lake, which invests in lower mid-market software and software-enabled companies. It also invests with SK Capital Partners, a mid-sized firm focused on the speciality materials, chemicals and pharmaceuticals sectors.
While it’s easy to write a big ticket and invest across several funds managed by one investment manager, it is difficult for even the largest to outperform across all strategies. It’s better, Ierardi says, to pick sector specialists. Writing big tickets for smaller funds allows Exelon to be a strategically important partner for the GP.
“We tend to focus on demonstrated, narrow expertise and alignment of interest in groups that are disproportionately hungry… If I had to choose blindly, we’d rather invest in a Fund II than a Fund VIII,” Ierardi says.
While Ierardi is willing to consider investments with a high-risk, high-return profile, he is quite conservative across the portfolio as a whole. A low-risk approach with limited use of credit lines that achieves returns in the low-to-mid teens is something to aspire to, he says.
“A lot of people will say we should be shooting for 20s but I’m not sure it’s that kind of business anymore. You can say ‘private equity should be the highest returning asset class in our portfolio’ but it doesn’t mean it has to be three times as good.”
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